Financial Planning Friday: Make 2018 better by Automating Your Personal Finances.

December 29th, 2017 by Anchor Bay Capital's Investment Team

As we approach the New Year, I am sure at some point you will have a moment of reflection on 2017 and thoughts of inspiration for what you can accomplish with another year.  While you make plans for the future, I would like to offer 3 ways that you can simplify your financial life by automating your financial decisions.  I have also included a few brief end of the year planning reminders.  Happy New Year!

The average American makes between 6 – 10 financial decisions every day.  Typically these are small decisions like how much to spend on lunch or what gas station to fill up at, but we also have the responsibility of making the major financial decisions for our future like how much money to save or what type of insurance to buy.  This bombardment of financial decisions on a daily basis can take its toll on us psychologically.  As a planner, I typically see people react in two ways to decision overload.  Either the choices become so overwhelming that we avoid them and do nothing, or we make unguided decisions and then we wonder with regret if we’ve done the right thing.  Both of these situations typically leave us with some remorse and we end up blaming our financial mistakes on willpower.  The comments made to me as a planner typically sound like this: “I’ll do better next month,” “I am going to start paying attention to this,” or “I just need to look at this more.”  In my experience, making smart financial decisions is not as much about willpower as it is about eliminating choices.  Essentially the point of a financial plan is to provide a roadmap for financial decisions so that your choices are made before they present themselves.  A good financial plan will include automating some of your financial decisions so that you are on a path to financial success

Automate your cash flow

You’ve probably heard that you should pay yourself first.  Those who spend first and save later never have as much as those who save first and spend later.  My twist on this is that you should not just automate your savings, but automate how much you have to spend.  You can accomplish this by setting up one account as your cash management account and using a separate account as your spending account.  Each paycheck should be deposited into your cash management account.  From the cash management account, set up the following automatic transfers:

  • Savings (cash savings, college education plans, IRAs) These should all be automatic transfers to separate accounts set up around the same date you get paid
  • Bills (utilities, insurance, etc.) Your bills should be paid from your cash management account. Some people do not like to automate their bill paying with automatic transfers. If this is you, that is ok.  You can semi-automate this by structuring your billing cycles around your paychecks. Set up the same bill paying date each month and send the payments on your own.
  • Spending – You should transfer a set amount each pay period to your spending account. This can be a transfer to an account with a debit card or a payment that zeros out a credit card.  This is the money you have to spend on your lifestyle.

Automate your budget

Once you are paying yourself, you will still need to monitor your spending so that you live within your means.  Nobody really likes budgeting, however you need to be aware of your expenses so that you can change or eliminate habits that may be draining your money.  Keep in mind also, that I am not necessarily talking about shopping.  Tracking your expenses can help you see if there are certain bills that should be negotiated down or eliminated. The best way that I have found to see what you are spending is with an automated budget.  There are several apps that allow you to create a budget.  At Anchor Bay Capital, we offer a personal financial dashboard that allows you to track all of your expenses through an app on your phone or wherever you can login online.  The great thing about the system is that you can set your budget expectations and you will be automatically notified if you exceed a budget.  This keeps you aware and lets you know if you are on track.

Automate your retirement savings

If you have a company plan, this is the easiest way to automate savings.  It comes right out of your paycheck.  If you don’t know how much to save, start with maxing out your employer match.  This means put in as much as you need to get your full employer contribution.  This is free money from your employer for your retirement.

If you do not have a company retirement plan, set up an IRA or a Roth IRA.  Once the account is set up, as I mentioned above, set up an automatic transfer on the say day you get paid.

You can always ask for assistance

We are here to help.  For me, the first of the year is filled with client meetings focused on updating financial plans and setting goals and expectations for the upcoming year. We are always happy to assist you with your plan and we can provide tools that will help you automate your financial decisions in 2018.

Here are some items that you may want to review to start the year:

  • If you are not retired, review your total contributions to retirement accounts.
    • 2017 401k limits: $18,000, Age 50 and older catch-up contribution: $6,000
    • 2018 401k limits: $18,500, Age 50 and older catch-up contribution: $6,000
    • 2017 IRA and Roth IRA limits: $5,500, Age 50 and older catch-up contribution: $1,000
    • 2018 IRA and Roth IRA limits: unchanged
  • Compare this year’s annual spending against your budget and evaluate adjustments
  • Review your 2017 income vs. 2016. If you have an increase, evaluate increasing your savings proportionately
  • Review your asset allocation of your investments and discuss any changes with your advisor
  • Set goals for major expenses like family trips, remodels, college expenses, and make adjustments to your budget for these goals.
  • Schedule regular dates throughout the year to evaluate your progress. I suggest monthly.  If you have a spouse or partner, schedule this together to discuss your goals or concerns.

Have a great 2018!